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Aussie, Kiwi Diverge amid Surprising Data, Central Bank Commentary

Thursday, 14 March 2013 11:29 GMT

by
Christopher Vecchio, Currency Strategist

A lot of attention is being paid to the currencies from down under, and for good reason.

ASIA/EUROPE FOREX NEWS WRAP

Volatility in the commodity currencies has been elevated overnight following a mixed tone by the Reserve Bank of New Zealand after its Rate Decision in pre-Asian trading, while labor market data out of Australia has provoked a complete 180 degree turn in sentiment regarding the Australian Dollar. Overall, however, demand for US Dollars has steadily increased over the course of the day, with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) working on a Hammer candlestick.

On the New Zealand Dollar: The RBNZ held its key interest rate on hold at 2.50% as expected, and policymakers are clearly upbeat about the long-term prospects of the economy. However, with exogenous risks remaining elevated (Chinese growth, European debt crisis), a severe drought affecting New Zealand, and a significantly stronger Kiwi than desire – some “10% to15%” – Governor Graeme Wheeler struck a dovish chord among market participants. Governor Wheeler’s commentary is directly aimed at weakening the New Zealand Dollar, a shot fired in the ‘currency wars,’ if you will. I’ll be watching inflation gauges – soft price pressures (ironically, resulting from the strong Kiwi) could be the impetus to cut rates.

On the Australian Dollar: The Australian economy added +71.5K jobs in February, well-above the forecast of +10.0K and well as the prior reading of +13.1K. But the metrics aren’t exciting: Full Time Employment only accounted for only +17.8K of the headline figure. So, even as the Participation Rate rose to 65.3% as the Unemployment Rate held at 5.4% (a sign of a structurally healthy labor market), this is not exactly a profoundly strong number. RBA Assistant Governor Christopher Kent advised not to “hinge too much on February job reading,” citing a sampling error leading to a ridiculously strong gauge. I’d agree: the February reading of +71.5K jobs nearly accounted for all of the job growth from April 2012 to December 2013 of +77.0K. I expect a heavy revision to the data, which could reignite rate cut expectations.

Taking a look at European credit, mixed but mostly higher peripheral yields have done little to help the Euro, which is the worst performing major on Thursday. The Italian 2-year note yield has decreased to 1.835% (-0.1-bps) while the Spanish 2-year note yield has increased to 2.229% (+1.9-bps). Likewise, the Italian 10-year note yield has increased to 4.676% (+2.0-bps) while the Spanish 10-year note yield has increased to 4.834% (+8.8-bps); higher yields imply lower prices.

EURUSD: While the Bullish Falling Wedge outcome remains possible, the breach of the yearly lows yesterday following better than expected US data has increased the likelihood of further losses before a rebound. Key support comes in at 1.2860/80, for three reasons: the 50.0% Fibonacci retracement on the July 24 low to the February 1 high; the 200-DMA; and the late-November and early-December swing lows. Failure in this area could lead to a ‘waterfall’ sell-off towards 1.2660. Resistance is at 1.3010/15 (8-EMA), 1.3080/100, and 1.3110/40 (March swing highs, 21-EMA). Support comes in at 1.2860/80 and 1.2660.

USDJPY: I maintain: “The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher. Downside pressure has been prevalent again on Wednesday, though bulls continue to fight the downturn.” Price has rebounded firmly above 96.00, and a test of the yearly high near 96.70 could be around the corner.

GBPUSD: No change: “There is potential for a GBPUSD reversal over the coming days, as exhibited by the Bullish Falling Wedge on the 4H chart, which could lead to a run up towards 1.5200 or 1.5300 on an overshoot. Reselling this area for new lows makes sense, it being major support over the past several years – the range dating back to August 2010, from 1.5300 to 1.6300. Resistance comes in at 1.4950/70 (descending trendline off of the February 8 and March 5 swing highs) and 1.4990/5000 (8-EMA, psychological level). Support comes in at 1.4830/40, 1.4780/80, and 1.4250/300.”

AUDUSD:Yesterday I said: “A break of 1.0340/80 points to 1.0460/80. An alternative bullish view of an Inverse Head & Shoulders may have formed on the 4H chart, adding further evidence for a run back towards the late-January swing highs.” Deceivingly strong Australian employment data has provoked the pair to rip into 1.0380, where it has been rejected thus far today, although the mid-February swing highs were tested. Failure could lead to a pullback below 1.0300 before the next drive higher. With the 8-/21-EMA crossover now close to turning bullish on the daily chart, the March low at 1.0110 may have been set.

S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”